A column on personal finance prepared by the Virginia Society of Certified
Public Accountants

THE TAX IMPLICATIONS OF SELLING YOUR HOME

(April 21, 2004) – Careful planning is the key to keeping most of
the profit from the sale of your residence. Under current law, a married couple
filing a joint return can exclude from income up to $500,000 of the gain made
on the sale of their principal residence. For a single person, the amount of
tax-free gain can be up to $250,000. The magnitude of this tax break makes
it critical that you plan to ensure that you qualify, advises the Virginia
Society of CPAs.

In the past, you were only eligible for a tax break if you rolled the profit
of your home sale into your next residence and the sales price of the residence
sold exceeded the cost of the new residence. Now, in addition to the $500,000/$250,000
exclusion, you no longer have to wait until you are 55 years old, to elect
to exclude all or part of the gain and you can take advantage of this tax break
more than once in your lifetime.

Qualifying for the Exclusion

To be eligible for the exclusion, you and your spouse (if married) must have
owned and used your home as your principal residence for at least two of
the five years that ends on the date of the sale. The periods don’t have
to be consecutive, as long as they add up to two years. Short, temporary, and
seasonal absences count as periods of use. If you have more than one residence,
only the sale of your principal home (the one you live in the most) qualifies
for the exclusion. The exclusion may not be used more frequently than once
every two years.

What if You Have to Move Sooner?

Special provisions apply if, as a result of some unforeseen event such as
a job change, illness, death of a spouse, divorce, or some other hardship,
you
are forced to sell your home before meeting the two-year residency requirement.
Depending on your circumstances, gain may be fully excluded or the exclusion
may be prorated based on the amount of time you lived in the house. For
example, if for health reasons, you had to sell your home after one year,
you can
take half of the exclusion, which means your first $125,000 of profit is
tax-free
if you’re filing as a single ($250,000 if married filing jointly).

Calculating Your Gain

In determining your gain, don’t forget to account for qualified expenses
that can be added to your home’s purchase price to increase your cost
basis on your original house, including the cost of the sale.
Increasing your cost basis helps to reduce the gain on the sale of your house
and may lower or eliminate a potential tax bill. Qualifying expenses include
home improvements, such as adding a room or a new roof, and the cost of settlement
fees, property inspection fees, and title insurance.
Unfortunately, if your gain exceeds the exclusion amount, there is no way to
avoid a tax bill. Rolling over your gain into a new residence is no longer
an option. You must report your non-excludable gain on your tax return and
compute your tax bill at the long-term capital gains rate, which, for most
taxpayers, is 15 percent.

Consult with a Tax Professional

Because of the potential tax savings and the complexity of the home sale exclusion
rules, it’s a good idea to check with a CPA before selling your home.

The Virginia Society of CPAs is the leading professional association
dedicated to enhancing the success of all CPAs and their profession by communicating
information and vision, promoting professionalism, and advocating members’
interests. Founded in 1909, the Society has nearly 8,000 members who work
in public accounting, industry, government and education. This Money Management
column and other financial news articles can be found in the Press Room on
the VSCPA Web site at www.vscpa.com.